China’s steel forecasts belie miners’ optimism

China’s steel-making peak body has slashed its outlook for long-term demand and forecasts the world’s second-biggest economy will need 40 per cent less steel by 2025 than estimates by Australia’s big three miners.

The downbeat forecast will put more pressure on the already battered iron ore price, and some analysts predict Chinese steel demand will fall in the next three years as the construction market remains weak.

China Iron and Steel Association deputy president Wang Xiaoqi told a forum that annual steel demand would remain at between 600 million and 700 million tonnes for the next 15 years. That compares to consensus forecasts of 1.1 billion tonnes.

BHP Billiton
,
Rio Tinto
and
Fortescue Metals Group
have been forecasting a recovery in iron ore prices in the second half of the year, driven by rising steel demand from infrastructure projects. But Beijing appears reluctant to embark on a fresh round of fiscal stimulus, because the economy is forecast to grow at 8 per cent this year and unemployment remains in check.

CISA has often been criticised for attempting to push down iron ore prices, but its latest forecast is not dramatically lower than those of other market analysts.

Lei Song, president of steel consultancy ChinaTSI, estimates annual demand will peak at 800 million tonnes and said Australian miners got “carried away" in expanding production so rapidly. “They were foolish and greedy. China can’t consume 1 billion tonnes of steel [in a year]."

The idea that Chinese consumption would peak at 1.1 billion tonnes by 2025 is based on annualised growth of 4 per cent. “The Chinese steel industry is entering a flat period after years of strong growth," Mr Song said.

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He also maintained Beijing “would put a lot of stimulus in place" to achieve an economic growth target of 8 per cent this year. This is at odds with Mr Wang, who said there was only a slim chance the government would launch a fresh fiscal stimulus.

Rio Tinto chief executive
Tom Albanese
is also at odds with Mr Wang.

“We still expect . . . a pick-up of growth in the fourth quarter as government stimulus starts to kick in," he said recently.

Fortescue is the most optimistic, however, and believes the iron ore price will rebound to levels around $US120 to $US150 a tonne “in the short to medium term".

The spot price fell another 4 per cent to $US90.30 a tonne yesterday.

China is the world’s largest steel producer, accounting for half the world’s output. But production has continued to outstrip demand for much of the year as large state-owned steel mills failed to reduce output.

“Weak steel demand had almost no impact on production in the first seven months of the year," said Tim Murray, the managing partner of J Capital, a firm which provides research for hedge funds. “That had to crack at some point."

Mr Murray said the “crack" came in the last week of July. He estimates steel mills cut production by 8 per cent in August. The production cut looks to have been triggered by a steep decline in new orders. In July, the official China Steel Purchasing Managers’ Index fell 13 percentage points from June to 33.3, its lowest since December 2008. A reading of at least 50 indicates the industry is expanding.

Falling new orders come when China’s steel inventory is at a record high. It’s estimated that China produced an additional 50 million tonnes of steel last year and is expected to have a similar surplus again this year. The 100 million tonne surplus is the equivalent of 1.5 months of production, three times the ideal level.

These giant surpluses are being driven by the weak property market. Mr Murray estimates the property sector used 215 million tonnes of steel in 2011, a 35 per cent rise in just three years. “That was clearly a bubble," he said. Mr Murray said overall Chinese steel demand might decline for the next three years as property reverted to more sustainable levels.

Beijing has spent much of the past two years attempting to slow the run-away property market, which had become unaffordable for the average Chinese family. The government restricted the number of properties an individual could own, and tightened credit. Property prices appear to have bottomed in recent months, but construction activity is expected to be subdued over the next few years. This is being reflected in Chinese steel prices.

On Wednesday the futures market for steel bars to be delivered in January touched a record low of 3327 yuan ($506) per tonne, a 25 per cent fall since April.